Dissolution of a partner firm-Notes

NOTES

CHAPTER 7: Dissolution of Partnership Firm

Reasons for dissolution of a firm:

  • Due to continued losses.
  • When court orders dissolution.
  • At the will of any partner in case of general partnership.
  • On the insolvency of all the partners.
  • On the expiry of term or objectives.

Example 1:

Pass the journal entries for following transactions on the dissolution of a firm of partners A & B:

  1. Old furniture which had been written off in the books was sold for Rs. 40,000.
  2. There was old machinery which had been written off in the books. It was estimated to realise Rs. 5,000 which was taken by B at the estimated price less 30%.
  3. Investments book value Rs 50000 realised at 120%.
  4. Debtors Rs. 2,64,000. Provisions for doubtful debts Rs. 24,000, Rs. 48,000 of the books debts proved bad.

Solution:

Journal
Date Particulars L.F. Debit Credit
 
 Bank A/c Dr.
 To realisation A/c
  
 40,000
  
40,000
 
 B’s capital A/c Dr.
 To realisation 
  
 3,500
  
3,500
 
 Bank A/c  (50,000 × 120/100) Dr.
 To realization A/c
  
 60,000
  
60,000
 
 Bank A/c (2,64,000 − 48,000) Dr.
 To realisation A/c
  
  
  

Example 2:

X, Y & Z were partners sharing profits in the ratio of 2 : 1 : 1. Their balance sheet as on 31.3.2018

Liabilities Amount Asset Amount
Capital A/c
 X
 Y
 Z
Reserves
Creditors
Bills payable
  
30,000
20,000
20,000
4,000
5,700
2,300
 Machinery
Joint life policy
Stock
Debtors
Less : provision
Bills receivable
Cash in hand
 50,000
4,000
20,000
7,000
(400)
400
1,000
 
 82,000
  
 82,000

The firm was dissolved on the above date:-

  • X took over the joint life policy at Rs. 5,000.
  • Stock realised Rs. 22,000.
  • Debtors realised Rs. 4,000.
  • Machinery was sold for Rs. 58,000.
  • Bill on hand realised in full. One bill for 500 under discount was dishonoured and had to be paid by the firm.

Prepare realisation account and capital accounts of partners.

Solution:

Realisation Account
Particulars Amount Particulars Amount
To machinery A/c
To joint life policy A/c
To stock A/c
To debtors
To bills receivable
To cash A/c
 Dishonor of bill 500
 S creditors 5,700
 Bills payable 2,300
To partner’s capital A/c
(realisation A/c)
 X 3,950
 Y 1,975
 Z 1,975
 50,000
4,000
20,000
7,000
400
 
 
 
8,500
 
 
 
 
7,900
 By provision for bad debts
By creditors
By bills payable
By cash A/c
Stock 22,000
Debtors 4,000
Machinery 58,000
B/R 400
By X’s capital A/c
(joint life policy taken over)
 400
5,700
2,300
 
 
 
 
84,400
5,000
 
 97,800
  
 97,800
Capital A/c
Dr. Cr.
Particulars X Y Z Particulars X Y Z
By realisation A/c
Joint life policy taken over
By bank A/c
 5,000
30,950
 
 -------
22,975
 
 ----
 
22,975
 By bal b/d
By realisation A/c
By reserve A/c
 30,000
3,950
2,000
 20,000
1,975
1,000
 20,000
1,975
1,000
 
 35,950
 22,975
 22,975
  
 35,950
 22,975
 22,975
Cash A/c
Particulars Amount Particulars Amount
To bal b/d
To realisation A/c
Stock 22,000
Debtors 4,000
Machinery 58,000
Bills receivable 400
 
 1,000
 
 
 
 
84,400
 
 By realisation A/c
Dishonor of bills 500
S creditors 5,700
Bills payable 2,300
By partners’ capital A/c
 X 30,950
 Y 22,975
 Z 22,975
  
 
 
8,500
 
 
 
76,900
 
 85,400
  
 85,400

Difference between dissolution of firm and partnership

S.No. Dissolution of firm Dissolution of partnership
1. It means end of all contractual relationship among the partners. It means change in relationship between partners.
2. The firms business is closed by realizing all assets and discharging all liabilities. The firms business is not closed only the assets and liabilities are revalued.
3. It happens only once in the life of a firm. It may happen any number of times in the life of a firm.
4. It is wider term and includes dissolution of a partnership. It is narrow term and does not include dissolution of firm.
5. Accounts required are realisation account capital account and cash or bank account. Revaluation accounts, capital accounts, and balance sheet are prepared.

Example 3:

Pass the journal entries for the following transactions in the books of A, B & C sharing profits in the ratio of 3 : 2 : 1 at the time of dissolution of the firm.

  1. Realisation expenses of Rs. 3,500 were to be borne by and also to be paid by A partner.
  2. B was given a loan of Rs. 30,000 by the firm.
  3. C a partner took a machinery for 10,000.
  4. Loss on dissolution was Rs. 4,000.
  5. Bank loan Rs. 50, 000 was paid.

Solution:



 

Journal
Date Particulars L.F. Debit Credit
 
 No entry for realisation expenses
  
  
  
 
 Bank A/c Dr.
 To loan A/c
  
 50,000
 
  
50,000
 
 C’s capital A/c Dr.
 To realisation A/c
  
 10,000
  
10,000
 
 A’s capital A/c Dr.
B’s capital A/c Dr.
C’s capital A/c Dr.
 To realisation A/c
  
 2,000
1,333
667

  
 
 
4,000
 
 Realisation A/c Dr.
 To bank A/c
  
 50,000

  
50,000